M/S.VERTEX COMMODITIES & FINPRO P. LTD,COCHIN vs. THE ITO, KOCHI

Per CHANDRA POOJARI, AM:

This appeal filed by the assessee is directed against the order of the CIT(A)-II,

Kochi dated 05/06/2018 and pertains to the assessment year 2011-12.

I.T.A. No.438/Coch/2018

1.1. The Appellant was formed as a separate company only because of statutory compulsion. As per the SEBI regulations, a company who is into equity broking cannot do Commodity broking. Hence the appellant was formed as subsidiary of Vertex Securities Limited (which is into equity broking)

1.2. The Appellant has brought in specialised managerial persons to the commodity business as the new market needed to be penetrated. They were dedicated professionals specialised in this segment.

1.3. A considerable amount of study and a fair analysis of expenses were made and sharing was fixed based on the consideration of all aspects.

1.4. The Appellant has claimed the managerial remuneration of those persons who are entrusted with the business of the Appellant exclusively. Similarly, Connectivity Charges, Rent, Telephone, Electricity and Travelling are also allocated based on the proportionate usage of such facilities/infrastructure.

1.5. The allocation of expenditure is based on a fair estimate of such usage arrived by the management depending on the factual situations.

Assessment Year Amount of Shared Remarks Expenses

2012-13 89,62,755.00 Assessment completed u/s 143(3)

2013-14 86,50,520.00 Assessment completed u/s 143(3)

2014-15 48,99,790.00 Assessment completed u/s 143(3)

It may be noted that the sharing of expenses for all subsequent years was accepted by the department and completed the assessment without any addition on this account during the scrutiny.

I.T.A. No.438/Coch/2018 2.1. From the above, it may be noted that the Appellant is consistently following this accounting policy which is accepted by the Department also.

claimed an expenditure of Rs.95,04,000/- under the head 'Expenses on Shared

Services'. The assessee stated that it had reimbursed some common expenses

incurred by its Holding Company of the assessee, M/s. Vertex Securities Ltd. which

was into broking services. The common expenditure met by the holding company

included (i) Managerial Remuneration, (ii) Communication Expenses, (iii) Travelling

& Conveyance Expenses, (iv) Connectivity Charges and (v) Rent. The assessee had

reimbursed 50% of all these expenses to the holding company. The profit and loss

account of the holding company, M/s. Vertex Securities Ltd. and the assessee

company are summarized below:

Description Holding Company , Assessee

Company

Brokerage Income 6,84,05,554 2,09,96.506

Other direct income 24, 31,676 0

Other income (excluding 1,22,96,931 27,06,354 income Shared)

Total Receipts 8,47,40,558 2,37,02,860

Total Expenditure 9,35,85,783 1,92,79,478 (excluding Expenses shared)

I.T.A. No.438/Coch/2018 Net income (before -88,45,225 44,23,382 including expenses shared)

Expenses shared -95,04,000 -95.04,000

Net income (after including 6,58,775 -50,80,618 expenses shared)

3.1 From the above, the Assessing Officer noticed that the holding company was

doing more than three times the business of the subsidiary company(assessee). The

expenditure which was shared @ 50% was Rs.95,04,000/-. According to the

Assessing Officer, the total turnover of both the companies taken together was Rs.

9,34,40,133/- (excluding other income) which meant that the assessee’s percentage

of turn over to the total turnover of both the assessees taken together was 22.47%.

Therefore, the Assessing Officer was of the view that the percentage of expenditure

that can be attributed to the assesses from the common expenditure cannot be

more than the percentage of turnover of the assessee. The total shared expenditure

of both the assessees taken together was Rs. l,90,08,000/- ( Rs.95.04,000 x 2). The

Assessing Officer rejected the explanation of the assessee that this being the initial

years of the formation of the company, the holding company had to give more

managerial attention to the company to get business on the reason that all the

above mentioned expenses had been shared equally whereas the share of business

of the assessee company was less than 23%. Considering all the circumstances, the

Assessing Officer allowed the shared expenditure @ 30% of the total expenditure of

I.T.A. No.438/Coch/2018 Rs. 1,90,08,000/- which comes to Rs.57,02,400/- Thus, the Assessing Officer made

the disallowance on this account at Rs.38,01,600/-( Rs. 95,08,000 -Rs. 57,02,400).

observed that the size of the assessee and its holding company are not same and

the turnover of the holding company was approximately three times higher than the

assessee company. The CIT(A) observed that neither during the course of

assessment nor during the course of appellate proceedings, the assessee had

explained the method on which these expenses were apportioned. The CIT(A)

found that 30% of the rent was apportioned to the assessee and all other expenses

like service charge, connectivity charges, Telephone & Electricity had been

apportioned at 50% each. From the payment of rent, the CIT(A) found that the

holding company was occupying at least 3 times the space occupied by the

assessee. In view of this fact, the CIT(A) opined that sharing of electricity and

telephone cannot be at the rate of 50% each. The CIT(A) rejected the assessee’ss

contention that no such disallowance was made in subsequent years as every year

is a different year. However, taking into consideration the judicial pronouncements

relied upon by the assessee, the CIT(A) was of the opinion that, if 40% of the

expenses were apportioned to the assessee, it shall meet the ends of justice. The

CIT(A) observed that the assessee's reliance on the decision of the Delhi High Court

in the case of CIT vs. EHTP India Pvt. Ltd. (350 ITR 41) (Delhi) was misplaced, as in

the instant case, there was no method of apportionment, there is no basis, it is

simply 50 – 50 and the size of two concerns was different and the turnover was also

I.T.A. No.438/Coch/2018 different. According to the CIT(A), an arbitrary method, which is capable of

distorting the profits cannot be said to be a method of accounting which would lead

to substantial variation in the income. Thus, in view of above discussion, the CIT(A)

allowed 40% of the expenses claimed in place of 30% allowed by the Assessing

Officer and directed the AO to recalculate the disallowance.

assessee had apportioned common expenses at 50% in respect of service charges,

connectivity charges, telephone & electricity. However, the Assessing Officer

apportioned the expenses only at 30% of the share of the assessee. The CIT(A)

considered it at 40% of the share of the assessee. The allocation of expenses was

made by the assessee on estimate basis. The apportion of the expenses at 50%

was consistently made by the assessee on continuous basis in subsequent years,

i.e., A.Ys 2012-13 to 2014-15. This was not disturbed by the Assessing Officer in

the subsequent years. In the assessment year under consideration, the Assessing

Officer disturbed the allocation of shared expenses, however, there was no re-

allocation of such shared expenses in the hands of the holding company, M/s.

Vertex Securities Limited. The Assessing Officer disturbed the allocation of shared

expenses only in the hands of the assessee which, in our opinion, would amount to

double taxation. In other words, if the Assessing Officer wants to reduce the

allocation of the shared expenses in the hands of the assessee, consequently, the

I.T.A. No.438/Coch/2018 balance amount of the shared expenses is to be allowed in the hands of the holding

company, M/s. Vertex Securities Limited which was not done by the Assessing

Officer which is inappropriate. In our opinion, the allocation of expenses was made

by the assessee on fair and reasonable basis and there is no basis for re-allocation

by the Assessing Officer. Hence, we are not in a position to agree with the order

of the CIT(A). Accordingly, we allow this ground of appeal taken by the assessee

and allow the shared expenditure as claimed by the assessee.

sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 7th March, 2019 GJ Copy to: 1. M/s. Vertex Commodities & Finpro (P) Ltd. , Thottathil Towers, IInd floor, Market Road, Ernakulam, Kochi-682 018. 2. Income Tax Officer, Ward-4(1), Kochi. 3. The Commissioner of Income-tax(Appeals)-II, Kochi. 4. The Pr. Commissioner of Income-tax, Kochi. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin

I.T.A. No.438/Coch/2018